There are times when I feel as if I’m the only guy watching this industry and shouting about the need to improve both revenues and profits and not by cutting yet more costs.

Cost cutting is good.  Cost cutting in the airline business is great.  But no amount of cost cutting ever fixed a business or an industry.  Have you ever heard of a company that became great or restored its greatness by simply cutting its costs?

It simply doesn’t happen.  Companies lifespans are extended by cutting costs.  They can be a way to get the markets to temporarily bump up the stock price.  It certainly can be a process that will improve merger prospects or even simply improve the money in the pocket of the top managers.

But it doesn’t make a business great.

I’m struck by the similarities going on between IBM and American Airlines today.  Each business has a long institutional history and a tradition of being successful without being glamorous.  Each has been in transition for a long time and each has struggled to be successful in the landscape in which it sits today.

For more background on IBM, take a look at this I,Cringely blog post about IBM.

Sounds awfully familiar, no?  The process of extracting life from the company and not paying attention to the revenue side of the business stands out in stark contrast to the competitors each company faces.

American Airlines has been headed down that same path for years.  Markets even rewarded their cost cutting for years as well while never really taking a long, hard look at how management was preparing for the need to improve revenue.

When I was self-employed in a business in the late 1990’s, we suffered an exceptional and abrupt downturn in our business.  After my partners and myself literally paid ourselves a couple of hundred dollars a week for a month, we realized that we couldn’t just cut costs.  Despite things being rather dire in our business, we embarked on a campaign to win more business with the only promise being made that we wouldn’t be too proud to go to anyone with hat in hand to ask for business.  Our mantra was that we would grow ourselves out of trouble.

We took on jobs we would have never done before and some that were actually a bit distasteful.  But at the end of 7 months, our business was not only thriving, we made record revenue *and* profits the very next year while maintaining a lean operation.  I paid more income tax that next year than I ever have in my life prior to that year.

American Airlines cut costs and didn’t invest in new equipment for years.  It ignored the death by a thousand cuts being handed to it by other airlines across the country.  And when those cuts began to be noticeable, American’s solution was to crouch in defense and concentrate more eggs in fewer baskets by focusing on its corner strategy.

Has anyone noticed that no one talks about the corner strategy anymore?  Not even Tom Horton who used it to great effect early in the AA bankruptcy process.

There is a very real, tangible reason why the US Airways executives had to take leadership in so many areas among the planned merger of US Airways and American Airlines.  US Airways management knows how to grow a business.  American Airlines management knows how to crouch in defense.  It’s an institutional mindset that doesn’t get changed easily and does most often get changed by  transfusions.

The crisis of the two companies has been averted but there is a lesson there for all companies in the industry and, most especially, for someone such as Southwest Airlines.  When you start stagnating and crouching in defense, it’s a very bad sign.  You can manage to keep your head above water for years but you can’t manage to get traction and win in the business.

Filed under: Mergers and Bankruptcy by ajax